Fujikura (TSE:5803) stock has risen by a remarkable 40% over the past three months. Given the company’s impressive performance, we decided to take a closer look at its financial indicators, as the financial health of a company in the long run usually determines market results. In particular, we will pay attention to Fujikura’s ROE today.

Return on equity (ROE) is a measure of how effectively a company increases its value and manages its investors’ money. In simpler terms, it measures a company’s profitability relative to shareholders’ equity.

Check out our latest analysis for Fujikura

How is ROE calculated?

Return on equity can be calculated using the following formula:

Return on equity = Net profit (from continuing operations) ÷ Equity

Based on the above formula, the ROE for Fujikura is:

14% = JP¥53 billion ÷ JP¥367 billion (based on the trailing twelve months to March 2024).

The “return” is the annual profit. You can imagine it like this: for every yen of shareholder capital, the company made 0.14 yen in profit.

What is the relationship between ROE and earnings growth?

So far, we have learned that return on equity is a measure of a company’s profitability. Depending on how much of those profits the company reinvests or “retains” and how effectively it does so, we can judge a company’s earnings growth potential. Generally speaking, all other things being equal, companies with high return on equity and earnings retention will have a higher growth rate than companies that do not have these characteristics.

Fujikura’s earnings growth and 14% ROE

At first glance, Fujikura appears to have a decent return on equity. Compared to the industry average return on equity of 7.4%, the company’s return on equity looks quite remarkable. This certainly adds some context to Fujikura’s exceptional net income growth of 56% over the past five years. We believe there could also be other aspects that are positively influencing the company’s earnings growth. For example, it’s possible that the company’s management has made some good strategic decisions or that the company has a low payout ratio.

Next, we compared Fujikura’s net profit growth with that of the industry. We were pleased to find that the company’s growth is above the industry average growth of 13%.

Earnings growth is an important metric to consider when evaluating a stock. It is important for an investor to know whether the market has priced in the company’s expected earnings growth (or earnings decline). This then helps them determine whether the stock is positioned for a good or bad future. What is 5803 worth today? The intrinsic value infographic in our free research report helps visualize whether 5803 is currently mispriced by the market.

Is Fujikura using its profits efficiently?

Fujikura’s three-year median payout ratio is on the low side at 19%, meaning the company retains a higher percentage (81%) of its earnings. So it looks like Fujikura is heavily reinvesting its earnings to grow its business, which is reflected in its earnings growth.

In addition, Fujikura has been paying dividends for at least ten years, which shows that the company wants to distribute profits to its shareholders.

Diploma

Overall, we think Fujikura’s performance has been quite good. In particular, we like that the company reinvests a large portion of its profits at a high rate of return. This has naturally led to significant earnings growth for the company. However, an examination of recent analyst forecasts shows that the company is likely to experience a slowdown in its earnings growth going forward. Are these analyst expectations based on broader expectations for the industry or on the company’s fundamentals? Click here to go to our analyst forecasts page for the company.

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.